October 16, 2021

A Guide to ISAs vs Traditional Private Loans

Tuition Options|Income Share Agreements

What's the difference between an ISA and a traditional student loan? In this post, we highlight some of the key differences of between them.

With student debt in America amounting to $1.6 trillion and 5.2 million student loan defaults last year, many are beginning to wonder if there’s a better way to pay for education.

The private student loan system no doubt stunts financial growth, serving the worst punishments to students who struggle the most to pay back their debt. The worst part of traditional private student loans is that they consist of fixed, inflexible, monthly payments that you owe regardless of whether or not you have a source of income at the time.

Private student loan debt follows you and grows bigger each day casting a shadow over your work with no thought to whether you’re doing well or poorly. Every day we read or hear of young people – some not so young anymore- who slowly fall behind on their payments until those payments affect the rest our your life.

What if there was a better way to finance your education?

What if you never had to take out personal loans to finance school? What if, instead of borrowing a large sum of money at a certain interest rate, you simply promised to share a percentage of your future earnings for a period of time to cover the cost of your education? What if that same agreement came with built-in benefits that pause your payments when things aren’t going how you expected them to? 

That’s the basic idea of Income Share Agreements, or ISAs. The concept of ISAs is not a new one. It’s been around since the 1950s when economist Milton Friedman introduced them as a model of repayment. The implementation of ISAs is new, though, as traditional student-loan defaults spike, and schools seek to offer other ways to help their students pay for their education. 

ISAs keep payments manageable by linking repayment to employment outcomes. If your education doesn’t pay off, you don’t pay either. 

So what makes an ISA different from traditional private student loans?

If you don’t have a job or make less than an agreed-upon amount, you don’t make payments

There’s this myth that states if you have a college degree you have a job. Sadly that’s not the case these days. Approximately 53% of college graduates are unemployed or working in a job that doesn’t require a bachelor’s degree according to Washington.edu

With traditional private loans, you’re obligated to pay them back whether you have a good-paying job or not. A bill comes in each month and if you can’t pay, your options are limited. ISAs are different. If you are unable to get a job after graduating, with an ISA you’re given flexibility. If you’re making less than what you and your school agreed upon in your contract (called the Minimum Income Threshold) or are unemployed, your payments are paused. You don’t have to make payments until you’ve found a gainful job. 

Aligned risk and rewards

Unlike traditional private loans, ISAs do not accumulate interest. Ever. There is a definite beginning and end to your payments. Students enrolled in an ISA will only pay back money if they earn over a certain amount, and those who are very successful will never pay back more than a capped limit. You’re finished with your payments once your payment window is over, your payment cap (the maximum amount of money that could be paid back) has been reached, or if you have made the total number of required payments (whichever comes first).

In an ISA contract, if you were to go to college as an economics major you would promise 10% of your income for 24 months (24 monthly payments) in exchange for $10,000 (the cost of your tuition). The cap on your total payment would be 2 times the amount received and the minimum income threshold (how much you have to be making before you begin paying back) is $20,000

Let’s compare three scenarios: one with the average starting salary of an economics graduate, $50,000, one with higher pay, perhaps at an analytics or investment firm, $80,000, and one with lower pay, say at a Starbucks, $17,000.

In the first scenario you’ll end up paying $416 monthly or $10,000 over the 24 months. In the second you pay 16,000. In the third scenario, you’ll pay nothing until your earnings climb above $20,000, but as long as you work full-time, your payment clock keeps ticking. If your earnings stay below $20,000 for the 24 months your obligation will end with no payments. 

Of course, the above examples are if your income stayed stagnant for the entire 24 months. If your income was cut in half or doubled your payments would be cut in half or doubled. But because the capped amount is 2 times the 10,000, the second you paid back 20,000 your payments would stop.

You can’t get these kinds of benefits with most private student loans. With traditional private student loans, whether you’re the Barista at Starbucks or the analytics specialist, you pay the same flat amount plus interest. 

An ISA is an investment in your future

Under an ISA students can make better choices in their education because they aren’t limited by finances. 

Because their future funding is dependent on graduates securing paid employment, schools are incentivized to ensure students are well prepared to succeed in the professional world. And because their payments are paused if the student is unemployed, schools with an ISA program are far more likely to help their students secure a job after graduation. 

Schools have little incentives to help graduates find a good-paying job post-graduation under private loans because 1) their payments are not tied to the student’s income and 2) a lender will have likely already paid them for your program. 

An alternative to the private student loan system in America is long overdue. We believe ISAs are our best option. Traditional private student loans have caused so much stress and pain in the lives of those with them. It’s time for a change and ISAs can be that change. If you’re looking to jump into a new career through an ISA funded education program, check out our student’s page for a list of schools that offer an ISA program, and jump-start your career today!

Although every effort has been made to provide complete and accurate information, Meratas Inc. makes no warranties, express or implied, or representations as to the accuracy of content contained herein. Meratas Inc. assumes no liability or responsibility for any error or omissions in the information contained herein or the operation or use of these materials.

About the author

This post was prepared by the author, in her/his personal capacity. The views expressed are her/his own, and do not necessarily reflect the views of Meratas Inc.
The information contained in this site is general in nature and should not be considered to be legal, tax, accounting, financial or other professional advice. In all cases, you should consult with professional advisors familiar with your particular situation prior to making any important decisions. Although every effort has been made to provide complete and accurate information, Meratas Inc. makes no warranties, express or implied, or representations as to the accuracy of this content. Meratas Inc. assumes no liability or responsibility for any error or omissions in the information contained herein or the operation or use of these materials. Copyright 2022

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